VOD’s vigor gives digital new hope

Digital revenue growing as physical media declines

The revenue flow for video-on-demand movies has grown from a dribble to a stream, that, according to some, might just persuade Hollywood to shake off worries about hurting its incumbent DVD and Blu-ray business and plunge headlong into VOD waters.

Opinions vary, and the numbers so far are inconclusive.

Hollywood, of course, would like nothing better than for VOD growth to make up for steep declines in its big physical-video cash cow, which shares the same release window as VOD.

Five years ago, a DVD release from a major used to generate, on average, an amount of revenue equal to the film’s domestic box office, says entertainment financial consultant Doug Lowell. Today, that figure is more like 60%. “Years ago, on-demand (revenue) was 2% to 4% of domestic box office (grosses) in the pay-per-view days, and now with the recent uplift from the Internet, it’s north of 10% for major studio films. I can see on-demand heading to 20%.”

While the growth of on-demand doesn’t completely offset DVD loss, it helps fill that gap.

That’s certainly big a step forward from just a few years ago, when, wrote BTIG Research analyst Richard Greenfield in an August research post, most content owners were skeptical of digital distribution, fearing its impact on their core business. “Fast-forward to 2011, and it feels as if everyone in Hollywood’s new favorite drug is called ‘digital’ and it appears to be quite addictive,” Greenfield wrote.

IHS Screen Digest estimates that consumer spending on internet VOD movie rentals went from an inconsequential $23 million globally in 2006 to $259.4 million in 2010.

For 2014, Screen Digest is forecasting $830.3 million in global iVOD (and the take is even bigger when adding in electronic sell-through, subscription-VOD revenue such as Netflix and also traditional VOD over cable systems).

In 2010, Screen Digest estimates that a blockbuster theatrical generated around 180,000 units domestically in electronic sell-through prior to its pay TV window in the U.S., and one-and-a-half to two times that level for rentals.

VOD actually does a better job of buttressing the loss of the physical DVD business than revenue figures show at first glance. Lionsgate has told Wall Street that VOD is growing from 10% of home entertainment revenue three years ago to a forecast 24% this year, but will account for an outsized 35% of home entertainment operating profit. “It’s not just of middling importance, it’s hugely important to our business,” says Lionsgate prexy Steve Beeks, because profitability is more important than revenue. On-demand doesn’t carry the physical duplication costs of DVDs.

Elsewhere, there’s anecdotal evidence of VOD momentum.

Hotel entertainment purveyor LodgeNet ended years of declines in per capita VOD movie revenues in June, when the metric rose 4%. The July gain for VOD movie revenue was on track to rise 6%. LodgeNet president of interactive and media networks Derek White attributes the bounce to variable movie pricing (ranging from $4.99 to an early-window fee of $17.99), discounting and better analysis of user behavior.

Warner Bros. is working to encourage the same type of “collecting” mentality for digital movies that exists in the physical DVD business, whether via interacting with Facebook users, creating the app Flixster Collections or supporting studio digital-locker cooperative UltraViolet.

“We’re very much the early stages and doing a lot of testing to understand what people want to hear about and what people don’t want to hear about,” says Thomas Gewecke, president of Warner Bros. digital distribution. “We want to ‘curate’ the experience, to be helpful but not intrusive. … There’s no template (yet) on how to do this.”

Asian VOD platforms are popping up, and some are programming Hollywood movies. Anyplex, a VOD platform serving Hong Kong and Taiwan, says that Hollywood films — which it added in March 2010 — now account for 70% of its revenue. Anyplex offers movies from all six majors. Youku, a video website for China that began providing VOD in 2010, programs VOD movies from Warner Bros., Paramount and other Western suppliers.

Hollywood film distributors particularly warmed to VOD overseas because the once-vibrant physical video businesses shriveled precipitously during the online era in some territories, especially in South Korea and Spain.

Historically, independent film distributors are the first to sell movies to new-release windows, but VOD has been a mixed bag. “Very few of the (VOD) systems have search capacities that help you highlight titles beyond the level of genre,” says Jean Prewitt, president and CEO of the Independent Film & Television Alliance. “Most independents say if their films didn’t have a significant release with a marketing campaign, it is difficult to get on VOD..”

There are some indie success stories. VOD platform Gravitas Ventures projects it will gross $500,000 in VOD for documentary “American: The Bill Hicks Story” over two years, compared with $91,000 generated by the film’s limited theatrical release.

Gravitas Ventures CEO Nolan Gallagher attributed the brisk VOD sales to the simultaneous 22-city theatrical release that cross-promoted VOD, plus upbeat reviews in print and on movie websites. Cable operators were given copies of the docu in advance, which spurred placement on barker channels.

Gallagher adds that the combined VOD-theatrical release is a growing trend, though making it pay off requires careful coordination.

And while the entire business is becoming viable, it is also has pitfalls, as evidenced by the way Netflix roiled its customer base when it abruptly separated its on-demand and physical DVD services, and raising prices to position itself for growth in streaming. It didn’t take long for Netflix to respond to the loud, negative chorus coming from its customers and from Wall Street, and the company quickly reversed course.